What is Short-Term Capital Gain on Shares? Meaning, Tax Rates & Rules

For many investors, the primary goal of investing money into the stock market is to earn profits by selling shares at a higher price than they were purchased. This profit, known as capital gain, doesn’t just add to your wealth; it also comes under the purview of taxation under the Income Tax Act.

What many investors may not realise is that the tax rate applied to these gains isn’t uniform. It varies depending on whether the gain is categorised as short-term or long-term. Here’s a detailed look at what short-term capital gains on shares mean, how short-term capital gains tax on shares are calculated and the rules that apply to them.

Understanding capital gains on shares

When you sell equity shares at a price higher than their purchase price, the profit you earn is called capital gain. In simple terms, capital gain is the difference between the purchase price and the selling price of shares. These gains are categorised into two based on the holding period of shares:

• Short-term capital gain (STCG)
• Long-term capital gain (LTCG)

What is short-term capital gain on shares?

The profits earned from the sale of listed equity shares held for up to 12 months are considered as short-term capital gains. For example, if you buy shares from a listed stock exchange and sell them within one year for a profit, the income you make is considered as STCG. These gains are usually taxed at a higher rate compared to long-term capital gains (LTCG). LTCG refers to the profits earned from the sale of shares after holding them for more than one year.

How is short-term capital gain on shares calculated?

For calculating the short-term gain tax on shares, you must know the purchase price and selling price of the shares. The formula is:

STCG = Selling Price – Purchase Price – Associated Costs

Associated costs include brokerage fees, transaction costs, commissions and any other costs during the purchase and sale of shares.

Here is an example: You purchased 1,000 shares for ₹1,00,000 in January 2025 and sold them for ₹1,50,000 after six months. The brokerage fee was ₹1,000.

STCG = ₹1,50,000 – ₹ 1,00,000 – ₹1,000 = ₹49,000

The tax under STCG will be applicable on ₹49,000.

What is capital gains tax in India?

The Government of India imposes a tax on profits or gains earned from the sale of capital assets such as shares, mutual funds, stocks, or real estate. This is called capital gains tax. The gain is considered part of your income and is taxable in the year the asset is sold or transferred.

Short-term capital gain tax rates

The short-term capital gain tax on shares depends on the type of asset. As per Section 111A of the Income Tax Act, short-term capital gains on listed equity shares and equity mutual funds are taxed at 20%, effective 23 July 2024. Earlier, STCG on shares was taxed at 15%. For other assets such as real estate, unlisted shares, etc., where Securities Transaction Tax (STT) is not applicable, the STCG tax rate on shares is based on the individual’s income tax slab.

The gains earned through STCG are taxed as per the below categories:

STCG under Section 111A

A 20% tax is levied on gains from the sale of:

• Equity shares listed in a recognised stock exchange
• Equity-oriented mutual funds traded through a recognised stock exchange
• Equity shares, equity-oriented mutual funds, or units of a recognised business trust traded on a stock exchange

Additional surcharge and cess may apply.

STCG not under section 111A

For the following transactions, tax is charged as per the individual’s income tax slab:

• Sale of equity shares not listed on a recognised stock exchange
  
• Sale of non-equity shares
  
• Sale of debt-oriented mutual funds
  
• Sale of government securities, bonds and debentures
  

Exemptions on short-term capital gain

There are certain exemptions under Section 54B and Section 54D of the Income Tax Act where short-term tax on shares may not apply:

• Gains generated from the sale of agricultural land used for agricultural purposes. But the proceeds must be reinvested in another agricultural land.
  
• Gains generated from selling industrial land or buildings used for industrial purposes. However, to avail of tax exemptions, the sale proceeds must be reinvested in another industrial property.
  
• If your total taxable income, including STCG, is below the basic exemption limit of ₹2.5 lakh for individuals, you may not be liable to pay tax on STCG.
  

Set-off and carry forward rules for STCG

When you sell assets at a loss within one year, it is called short-term capital loss. In such cases, the Income Tax Act allows you to set-off or adjust your capital loss in the following ways:

• Short-term capital loss (STCL) can be set off against both short-term and long-term capital gains in the same financial year.
  
• If the entire loss cannot be set-off in the same year, you can carry forward the remaining loss for up to eight assessment years.
  
• You can set-off the carried-forward losses only against future capital gains and not on salary or business income.
  

Tips to reduce short-term capital gains tax

Short-term gain tax on shares can increase your tax liability. However, there are ways to reduce the tax burden:

• Hold shares for longer duration: As short-term capital gains are generally taxed at a higher rate than long-term capital gains, it is advisable to hold the shares for more than a year, if possible, to reduce the taxable income.

• Utilise capital losses: By offsetting STCG against any capital losses from other investments, it will help reduce your taxable income.

• Tax-loss harvesting: Tax loss harvesting is the practice of selling shares at a loss to offset your gains. This can reduce your taxable STCG and lower your overall tax liability.

Conclusion

Selling shares within a year of purchasing can fetch short-term capital gains (STCG) on shares. But, remember, capital gains tax is applicable in India and share short term capital gain tax is generally higher than LTCG, increasing your tax liability. So, understanding how STCG works, the tax rules, and tips to reduce the STCG tax can go a long way in reducing the tax burden and help in effective financial planning.

Read more:

Short Term Capital Gain Tax (STCG) on Mutual Funds
Capital Gains Tax on Property: Rates, Calculation & Exemptions

Sources

Clear Tax
Kotak Mutual Fund
Religare
Bank of Baroda
Investopedia